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External Debts and Current Account Adjustments

  • Bulut Levent


    (Georgia State University)

We empirically investigate the effect of net external-debt positions on the size of medium-term current account balances. We utilize an approach where net external-debt positions dampen the widening of the current account balances. In a simple accounting framework, we find supportive evidence of the adjustment role of the net external-debt positions on the current account balances. Our findings show that net external-debt holdings affect current account imbalances through their effect on private consumption. Government expenditure and domestic investment, on the other hand, are not negatively affected by net external-debt holdings. We show that, on average, developing countries in the sample would have run a 2.7 percentage points wider current account deficit in the absence of the negative impact of net external debts. Net external-debt positions, therefore, reduce the dispersions of current account imbalances and thus increase the correlation of investment and saving ratios.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 11 (2011)
Issue (Month): 1 (December)
Pages: 1-53

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Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:37
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